Will the Tort of Bad Faith Breach of Contract Be Extended to Health Maintenance Organizations?

See, e.g., Insurance Must Pay for Health Tests, Jury Says , Los Angeles Times, July 2, 1982, at 11; Zalta E. , Patient Advocacy Does Work , LACMA Physician, pp. 9–11 (January 19, 1982).

This principle originated in Comunale v. Traders and Gen. Ins. Co., 328 P.2d 198 (Cal. 1958), and has been reiterated on numerous occasions in subsequent cases, articles, and treatises. See, e.g., Egan v. Mutual of Omaha Ins. Co., 620 P.2d 141 (Cal. 1979), cert. denied, 445 U.S. 912 (1980) [hereinafter referred to as Egan]; Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973) [hereinafter referred to as Gruenberg]; Crisci v. Security Ins. Co., 426 P.2d 173 (Cal. 1967); U.C.C. §1-203 (1978); Corbin A. , Contracts 3: §541 (1960) at 97; Allen , Insurance Bad Faith Law: The Need for Legislative Intervention , Pacific Law Journal 13: 833 (1982) [hereinafter referred to as Allen]; Diamond , The Tort of Bad Faith Breach of Contract: When, If At All, Should It Be Extended Beyond Insurance Transactions? Marquette Law Review 63; 425 (1981) [hereinafter referred to as Diamond]; Londerback Jurika , Standards for Expanding the Tort of Bad Faith Breach of Contract , University of San Francisco Law Review 16: 187 (1982) [hereinafter referred to as Londerback & Jurika].

See, e.g., Christian v. American Home Assurance Co., 577 P.2d 899 (Okla. 1978); Anderson v. Continental Ins. Co., 271 N.W.2d 368 (Wis. 1978); United Services Automobile Ass'n v. Werley, 526 P.2d 28 (Ala. 1974); Gruenberg, supra note 2.

See Neal v. Farmers Ins. Exchange, 582 P.2d 980 (Cal. 1978) ($1,548,211.35 punitive damages awarded by jury reduced by trial judge to $749,011.49); Pistorius v. Prudential Ins. Co., 176 Cal. Rptr. 660 (Cal. App. 1981) ($1,000,000 punitive damages); Delos v. Farmers Ins. Group, Inc., 155 Cal. Rptr. 843 (Cal. App. 1979) ($4,000,000 punitive damages awarded by jury reduced by trial judge to $350,000); Fletcher v. Western Nat'l Life Ins. Co., 89 Cal. Rptr. 78 (Cal. App. 1970) ($640,000 punitive damages awarded by jury reduced by trial judge to $180,000); Wetherbee v. United Ins. of America, 95 Cal. Rptr. 678 (Cal. App. 1971) ($200,000 punitive damages).

Approximately 60 percent of states considering this tort have judicially accepted it. See, e.g., Gibson v. Nat'l Ben Franklin Ins. Co., 387 A.2d 220 (Me. 1978); Old Southern Life Insurance Co. v. Woodall, 348 So.2d 1377 (Ala. 1977); Vernon Fire and Casualty Ins. Co. v. Sharp, 349 N.E.2d 173 (Ind. 1976); Grand Sheet Metal Products Co. v. Protection Mut. Ins. Co., 375 A.2d 428 (Conn. Super. 1977). Other states have statutory provisions which have been considered the sole remedy. See, e.g., Del. Code Ann. tit. 18, §4102 (1974); Ga. Code Ann. §56-1206 (1977); La. Rev. Stat. Ann. §§22:656, 657 (West 1978). For a recent analysis of bad faith law, see Londerback Juricka , supra note 2; Allen , supra note 2. See also Plugging the Cracks: The Basis and Extent of Liability for First Party Bad Faith Claims , Insurance Counsel Quarterly 72: 79–101 (Fall 1981).

Egan , supra note 2.

The tort has been applied recently to the context of employment. See Tameny v. Atlantic Richfield Co., 610 P.2d 1330 (Cal. 1980); Pugh v. Sees Candies, Inc., 171 Cal. Rptr. 917 (Cat. App. 1981); Cleary v. American Airlines, Inc., 168 Cal. Rptr. 722 (Cal. App. 1980). See also Wagner v. Benson, 161 Cal. Rptr. 516 (Cal. App. 1980) (possible extension to banking industry). Some commentators have recommended further extensions where public policy warrants. See, e.g., Diamond , supra note 2.

See Luft , How Do Health Maintenance Organizations Achieve their “Savings,” New England Journal of Medicine 298(24): 1336 (June 15, 1978); Wolinsky , The Performance of Health Maintenance Organizations: An Analytic Review , Milbank Memorial Fund Quarterly 58:537, 546 (1980).

Since the HMO acts in such situations as an insurer, it would likely come within the statutory guidelines to which insurers must conform. For example, a section of the California Insurance Code, which outlines the specific requirements of insurers, has formed the basis of many claims against HMOs which fail to compensate enrollees on a timely basis. Cal. Ins. Code §790.03 ( West 1981).

A corporate attorney representing an HMO in southern California has stated: “The special relationship in an HMO does aggravate their exposure … because an HMO is a provider of medical services and, at the same time, it can withhold these services.” Personal interview with HMO attorney in Los Angeles, Calif. (July 27, 1982). In researching this article, the author interviewed four attorneys representing various HMOs, as well as three attorneys representing plaintiffs and defendants in HMO bad faith suits. Since none wanted their names to be used, their confidentiality shall be preserved.

For a more complete discussion of provider's potential conflict of interest as a board member of the HMO, see Stern , Potential Liability of the Board of Directors of a Health Maintenance Organization , Whittier Law Review 3 (1): 1, 15–20 (1981).

See, e.g., Spencer v. Aetna Life and Casualty, 611 P.2d 149 (Kan. 1980); Egan v. Mutual of Omaha: The Expanding Use of Punitive Damages in Breach of Insurance Contract Actions , San Diego Law Review 15: 287, 298–301 (1978).

See Egan , supra note 2. Note also the extensive federal and state governmental involvement in HMOs as provided in the Health Maintenance Organization Act of 1973 and, for example, in the California Health and Safety Code. 42 U.S.C. §300e (1976); Cal. Health & Safety Code §§1340 et seq. (West 1980).

Crisci v. Security Ins. Co., 426 P.2d 173, 178 (Cal. 1967); Chelini v. Nieri, 196 P.2d 915, 917 (Cal. 1948); Fletcher v. Western Nat'l Life Ins. Co., 89 Cal. Rptr. 78 (Cal. App. 1970).

Silberg v. California Life Ins. Co., 521 P.2d 1103 (Cal. 1974) [hereinafter referred to as Silberg].

See Shernoff , Insurance Company Bad Faith Law: A Potential Weapon for Consumer Protection , Trial 17:22 (May 1981) [hereinafter referred to as Shemoff].

Sarchett v. Blue Shield, No. EAC-24405 (Pomona County Court, Calif., July 1982) (currently on appeal).

Egan , supra note 2.

Spindle v. Travelers Ins. Co., 136 Cal. Rptr. 404 (Cal. App. 1977).

Christian v. American Home Assurance Co., 577 P.2d 899 (Okla. 1977); Communale v. Traders and Gen. Ins. Co., 328 P.2d 198 (Cal. 1958).

Gruenberg , supra note 2.

Sexton v. Meridian Mut. Ins. Co., 337 N.E.2d 527 (Ind. 1975); Christian v. American Home Assurance Co., supra note 21.

Shernoff , supra note 16, at 25.

Id. Cf. Silberg , supra note 15, at 1111 (slogan on contract constitutes express promise by insurer). But see D'Ambrosio v. Pennsylvania Nat'l Mut. Casualty Ins. Co., 396 A.2d 780 (Pa. 1978).

As many HMOs have binding arbitration clauses in their subscriber contracts, it is likely that additional claims are being pursued through arbitration. Many such clauses however, have been deemed invalid. See Davis v. Blue Cross of Northern California, 600 P.2d 1060 (Cal. 1979). It is unclear how Davis affects many HMOs' binding arbitration clauses. Cf. Beynon v. Garden Grove Medical Group, 161 Cal. Rptr. 146 (Cal. App. 1980) (uses Davis reasoning to delete portion of arbitration clause).

A prominent Los Angeles area plaintiff's attorney has noted: “Most of the [bad faith] claims [against HMOs] have been regarding indemnification where the plan… refused to pay the claim because the member did not go to one of their facilities.” Personal interview with plaintiff's attorney, Los Angeles, California (June 30, 1982).

See Gruenberg , supra note 2. An attorney employed by an HMO located in southern California stated: “Bad faith law tends to treat a bad faith action in tort as independent of the specific terms of the HMO contract.” Personal interview with attorney, Los Angeles, California (July 13, 1982).

Silberg , supra note 15, at 1104.

Egan , supra note 2.

See Gruenberg , supra note 2.

Fletcher v. Western Nat'l Life Ins. Co., 89 Cal. Rptr. 78, 93 (Cal. App. 1975).

See Neal v. Farmers Ins. Exchange, 582 P.2d 980 (Cal. 1978); Silberg, supra note 15; Delos v. Farmers Ins. Group, Inc. 155 Cal. Rptr. 843 (Cal. App. 1979). See also Diamond , supra note 2.

See cases cited, supra note 4.

See Grimsby v. Samson, 530 P.2d 291 (Wash. 1975); DeCicco v. Trinidad Area Health Ass'n, 573 P.2d 559 (Colo. App. 1977). It should be noted that a suit alleging intentional infliction of emotional distress (IIED) as a separate cause of action may be successful under these circumstances. Even without physical injuries, an enrollee may sue for IIED if the HMO acts recklessly, its conduct is sufficiently “extreme and outrageous,” and the resultant distress is “severe.” See Restatement (Second) of Torts (1977) §46. Moreover, the “severe” and “outrageous” elements may be proved more easily in such cases given the vulnerable condition of the “sick” patient and the fiduciary nature of the relationship between the HMO and the enrollee. See, e.g., Rockhill v. Pollard, 485 P.2d 28 (Ore. 1971). Since IIED is an intentional tort and the specific elements of a negligence case do not apply, expert testimony may not be necessary, causation may be inferred more readily, the statute of limitations is likely to be longer, and punitive damages may be awarded.

Indeed, these are the “typical complaints” consumers have against HMOs, particularly those consumers who are accustomed to get whatever services they have requested from their providers. For example, one new enrollee in an HMO plan based in southern California was particularly enraged when, after falling on her knee, her request to her HMO primary care physician to see an orthopedist was categorically refused as being “unnecessary and uneconomical.” Personal interview with HMO subscriber, Los Angeles, Calif. (June 1982).

A corporate attorney for an HMO based in southern California has stated: There is always a lot of clout behind a lawsuit alleging a concerted effort not to treat, and it probably occurs more [often] than you would think. Of course, there is always an economic advantage to the HMO to withhold treatment but it may be difficult to prove to the court that this has been a primary motivation of the HMO. Personal interview with HMO attorney, Los Angeles, California (July 13, 1982). Proof of motive may be available from several sources, including disillusioned providers and disgruntled employees. Indeed, the latter have been the source of some very damaging evidence against insurance companies.

Kirsch , A Death at Kaiser Hospital , California Magazine, p. 78 (November 1982).

With hindsight, an HMO may easily argue that in many, if not most, cases, the “condition” (as opposed to illness or injury) existed before the patient's enrollment in the HMO.

Coordination of benefits clauses relate to the payment for and provision of services to enrollees who are entitled to coverage under more than one plan or company. Similar problems may arise when HMOs refuse coverage for services available under workers' compensation, veterans' benefits, and governmental health programs.

An in-house HMO attorney for a southern California HMO specifically indicated to the author that decisions about the alcoholic enrollee is a major problem facing the HMO. The expense of treatment can be enormous, and the physical problems of the alcoholic, as well as the need for continuous emergency detoxifications, require ongoing medical care. Personal interview with HMO attorney, Los Angeles, Calif.

Telephone interview with attorney from Illinois-based HMO (October 25, 1982).

D'Ambrosio v. Pennsylvania Nat'l Mut. Ins. Co., 396 A.2d 780,786 (Pa. Super. 1978).

See, e.g., CAL. Health & Safety Code §1363 (West 1979); Cal. Admin. Code tit. 10, §1300.63 (1982). Nevertheless, the time period between utilixation of a misleading (unapproved) form and state enforcement of the provision is so lengthy as to lessen the likelihood of meaningful action to eliminate such abusive practices. See Transcript of KNXT Channel 2 News, Expose on Group Health Care Plans (August 30–31, 1982). Moreover, oral representations by marketing representatives of various plans are particularly difficult to regulate. In California, for example, anyone can sell a plan: No registration or exam is necessary. Thus, tremendous abuses have occurred, particularly where HMO agents have been paid a commission based upon the number of individuals enrolled in the plan. In such cases, solicitors are “motivated” to promise far more than what is available from the HMO. See Schneider Stern , Health Maintenance Organizations and the Poor: Problems and Prospects , Northwestern Law Review 70: 90 (1975).

Zalta , Patient Advocacy Does Work, LACMA Physician, pp. 9, 11 (January 19, 1981).